One of the major debates raging in the financial press is whether or not housing is in a speculative "bubble." Opinions vary among the experts and even the ones who have a track record of being mostly correct are divided on this topic. It's difficult to find a clear-cut answer to this most important question, an area of investment that for the average America is far more important than the stock market.

Admittedly, the raw housing data can be confusing and at times contradictory when it comes to answering this question. Arguments can be made to support either of the two major positions, viz., "housing bubble" or "healthy demand." So let's see if we can sort through some of this data and derive a clear picture of what the outlook is likely to be for the housing market in the months ahead.

The technical market picture suggests that the bulls have gotten carried away with their excessive enthusiasm, at least in the near term. The S&P 500 Homebuilders Index is currently testing a pivotal uptrend line, which if broken will confirm a short-term top for the homebuilders. There is pivotal resistance between the 1,000-1,050 area that looks very strong.

The Housing Market Index (the survey by the National Association of Homebuilders that tracks single-family housing sales, expected sales and prospective buyer traffic) is currently bearish as it has been decreasing since December. The graph depicting New Home Sales also looks bearish and has been quite volatile for some time now after peaking last summer.

Fundamentally, the homebuilding sector is overbought and there are simply too many houses being built on "spec" up and down the East Coast area in particular. Here in the coastal Carolinas you cannot open the real estate section of a newspaper without seeing a number of homes being advertised for sale that have not yet been completed. They do not have pictures of the houses being sold as they would normally, but instead artist sketches of what the home is anticipated to look like upon completion. Every month there are more sketches and fewer photos of already built homes.

Commenting on this phenomenon of excess speculative building of high-end homes, Bert Dohmen in his Wellington Letter (www.dohmencapital.com) observes, "Greed has finally taken over. Even in low cost Las Vegas, the new condos are being offered at $1000 per sq. ft. That's outrageous. I predict that the buyers will not be there at the time of closing. In most states, the buyer can rescind anytime before completion of the building. When all those 'pre-sales' are cancelled, the developers will get their just reward for greed."

Market cycles expert Samuel J. Kress of SineScope observes, "The housing sector is in a bubble, notwithstanding what the 'talking heads' are saying. When the 30-year cycle peaked in late 1999 and the stock market bubble peaked, the public simply transferred money into another bubble, namely, real estate."

Robert Campbell, author of the book "Timing the Real Estate Market" and editor of an excellent newsletter on the Southern California property market, "The Campbell Real Estate Timing Letter," comments further on this phenomenon, or what might be termed "bubble transferal":

"The 1990's roaring bull market on Wall Street was everyone's answer to higher investment returns. The S&P 500 rose more than 26% in 1991 -- and this was just the beginning. The S&P 500 would rise by 400% during the next nine years!"

He continues, "In early 2000, there came a huge fall-off in demand for insanely overvalued securities....With interest rate yields so small, investors were once again looking for new ways to 'score.' As investors moved away from the stock market, they moved into real estate. Fueled by some of the lowest mortgage rates in history and easy qualifying loans, the hysteria to make money by investing in real estate -- especially in the highly cyclical housing markets of Southern California -- seems to be a mirror image of the hysteria to make money in stocks during the last decade."

Campbell points out that it has not so much been a case of the housing market going up because people are buying houses, but rather, people are buying houses because the market is going up. In other words, higher prices have acted to attract even more speculative money flows into the housing sector. However, with housing prices rising anywhere from five to 10 times faster than median household incomes (which Campbell defines as a real estate P/E ratio), housing has turned into a pure momentum play, not a value play. The question then becomes one of when does the momentum finally run into an inexorable force and reverse itself?

Supply will eventually exceed demand later this year with the rate of change slowdown in the money supply, which will sooner or later accelerate this trend. The coming year may not be a good one for the housing sector, unlike previous years, and 2005-2006 could very well be "correction" years for the housing market.

Speaking of money supply, Don Hays in his latest market comments has pointed out that the 3-year annualized growth in the MZM money supply is at its lowest level since 1995. While this in and of itself doesn't necessarily send a screaming bear market signal, it does provide a "heads-up" that if the Fed continues to let the monetary aggregates slide like they have lately, we'll have an economic slowdown on our hands later in the year.

Hays points out that back in '95 when the annualized MZM was reaching its lowest low in a decade (like it is now), it resulted in a sharp drop in GDP growth. Of course this was later corrected in 1996-1997, but you may remember the temporary damper on economic activity in some sectors back then. I can remember the rather large increase in apartment vacancies in the metropolitan area I was living at that time before the economy turned around again thanks to the late '90s bull market.

We are at a different point along the long-wave cycle this time around, however, and it is my opinion that the Fed can ill afford to let the contraction in money supply rate of change continue for much longer without serious consequences, most of which probably won't be seen until later this year or by early 2006.